The Financial Services Authority offers advice on buying PPI policies
The Competition Commission has criticised the Payment Protection Insurance (PPI) market after a flood of complaints of mis-selling by consumers.
It found that it is highly profitable for distributors and there is little competition between providers.
Its report also found that there is little scope for customers to search for alternatives and switch products.
Separately, the Financial Services Authority is taking action against unfair practices by PPI providers.
PPI is typically sold alongside a loan and provides cover if the debt repayments cannot be met.
In June this year, the Competition Commission concluded that banks and credit card companies were overcharging their PPI customers by a total of £1.4bn a year.
It blamed a lack of competition at the point of sale when people took out a loan, and suggested that selling PPI at the same time as approving a loan might be banned.
The commission has now invited views on how best to tackle the problems that it has identified, and will make its final recommendations in November or December.
A mystery shopper exercise - carried out by the FSA - found that customers were regularly not told the full details of the policies sold.
It looked at how PPI was sold alongside a loan and found that very few customers were told that the cost of the cover would be added to their loan and that they would have to pay interest on it.
Only half of people sold PPI were told what the limitations and exclusions of the policy were, which allows the customer to decide if they would be eligible to claim.
Many people were also not told about both the monthly and the total cost of the policy, with the worst performing firms offering adequate information on cost to very few customers.
The FSA is considering how best to tackle the problem. Possible sanctions include financial penalties, stopping certain firms selling PPI, and action against individuals.
The FSA says it has told companies what is expected of them and if firms are unable to meet the criteria, the regulator says they should stop selling PPI policies.